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The Timing of Bets and the Favorite-Longshot Bias

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Author Info
Marco Ottaviani (London Business School)
Peter Norman Sørensen (Institute of Economics, University of Copenhagen)

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Abstract

In parimutuel betting markets, it has been observed that proportionally too many bets are placed on longshots, late bets are more informative than early bets, and a sizeable fraction of bets are placed early. We propose an explanation for these facts based on equilibrium incentives of privately informed rational bettors, who profit from betting against bettors with recreational motives. We show that small rational bettors who act on private information have an incentive to wait until the last minute, and then bet without access to the information of the others. Once the distribution of bets is revealed, the longshot is recognized to be less likely to win than was originally thought. When acting on common information instead, bettors have an incentive to place early bets in order to preempt others from exploiting the same information.

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Publisher Info
Paper provided by University of Copenhagen. Department of Economics. Finance Research Unit in its series FRU Working Papers with number 2004/12.

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Length: 19 pages
Date of creation: Nov 2004
Date of revision:
Handle: RePEc:kud:kuiefr:200412

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Related research
Keywords: parimutuel betting; favorite-longshot bias; private information; timing;

Other versions of this item:

Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
  2. Frédéric KOESSLER & Anthony ZIEGELMEYER, 2002. "Parimutuel Betting under Asymmetric Information," Working Papers of BETA 2002-17, Bureau d'Economie Théorique et Appliquée, ULP, Strasbourg. [Downloadable!]
    Other versions:
  3. JULLIEN, Bruno & SALANIÉ, Bernard, 2005. "Empirical Evidence on the Preferences of Racetrack Bettors," IDEI Working Papers 178, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
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    Other versions:
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    Other versions:
  6. Matsumura, Toshihiro, 1999. "Quantity-setting oligopoly with endogenous sequencing," International Journal of Industrial Organization, Elsevier, vol. 17(2), pages 289-296, February. [Downloadable!] (restricted)
  7. Camerer, Colin, 1996. "Can Asset Markets be Manipulated? A Field Experiment with Racetrack Betting," Working Papers 983, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
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  13. Shin, Hyun Song, 1991. "Optimal Betting Odds against Insider Traders," Economic Journal, Royal Economic Society, vol. 101(408), pages 1179-85, September. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jianying Qiu, 2007. "Loss aversion and mental accounting: the favorite longshot bias in parimutuel betting," Jena Economic Research Papers in Economics 2007-017, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics, Thueringer Universitaets- und Landesbibliothek. [Downloadable!]
  2. Frederic Koessler & Ch. Noussair & A. Ziegelmeyer, 2005. "Individual Behavior and Beliefs in Experimental Parimutuel Betting Markets," THEMA Working Papers 2005-08, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise. [Downloadable!]
  3. Frédéric Koessler & Charles Noussair & Anthony Ziegelmeyer, 2007. "Information Aggregation and Beliefs in Experimental Parimutuel Betting Markets," Discussion Papers on Strategic Interaction 2005-12, Max Planck Institute of Economics, Strategic Interaction Group. [Downloadable!]
    Other versions:
  4. Frederic Koessler & Charles Noussair & Anthony Ziegelmeyer, 2006. "Parimutuel Betting under Asymmetric Information," Discussion Papers on Strategic Interaction 2006-05, Max Planck Institute of Economics, Strategic Interaction Group. [Downloadable!]
    Other versions:
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